Academic journal article International Journal of Business

Efficiency Differences between the S&P 500 and the Tel-Aviv 25 Indices: A Moving Average Comparison

Academic journal article International Journal of Business

Efficiency Differences between the S&P 500 and the Tel-Aviv 25 Indices: A Moving Average Comparison

Article excerpt


This paper compares the Tel-Aviv Stock Exchange (TASE) 25 Index (TA25) to the S&P 500 Index with respect to the extent that the Technical Analysis method of moving average can beat the buy-and-hold policy. Previous research on the S&P 500 Index is inconclusive, while TA25 has never been tested in this respect. For 1,500 daily observations, our test results imply weak-form efficiency of the S&P 500 Index. For TA25, no market efficiency is found for relatively short moving averages. The results imply that market efficiency is higher in developed financial markets than in an emerging capital market, such as the TASE.

JEL: G14, G15

Keywords: Technical analysis; Moving Average; Buy and hold policy; Market efficiency


Random Walk and Efficient Market Hypotheses are central ideas in explaining financial market efficiencies. The assumption that market behavior embodies and reflects relevant information has a great impact on securities prices. Any change in the relevant information causes price adjustment. In contrast, technical analysts argue that prices gradually adjust to new information. Thus, historical analysis is useful in diagnosing the repeated pattern behaviors leading to active investment strategies that generate better-than-market returns.

The purpose of this study is to examine the efficacy of using technical trading rules in the emerging market of Israel, through the analysis of the Tel-Aviv 25 Index (TA25) and to compare its weak-form market efficiency [as defined in Fama (1970)] to the performance of the S&P 500.

The main criticism of technical analysis is that it seems to have no plausible explanations as to why these patterns should indeed be expected to repeat. Jegadeesh (2000) provides an up to date summary of such criticism. Given the inconclusive evidence concerning technical analysis in general and the moving average (MA) method in particular it would be interesting to apply this method to the emerging market of Israel, for which no such study of a major stock index of the Tel Aviv Stock Exchange has been reported yet. It would also be interesting to investigate the extent to which the MA method, applied to the TA25 stock index outperforms the simple buy-and-hold (BH) policy, and compare the empirical results of the TA25 to those obtained for the US S&P 500 index, using the same methodology and time period.

Many mutual fund managing firms, most of them are affiliated with commercial banks in Israel, offer index funds, resembling the TA25 index, and the rest are non-bank mutual fund managing firms. One investment feature related to the transactions costs issue, which is worth emphasizing, is that mutual fund managing firms in Israel do not charge an extra fee on revising a mutual fund portfolios as long as the revision involves mutual funds, index funds or other financial instruments managed by the same managing firm. In such an investment environment, the transaction costs argument in the context of the MA argument is weaker, particularly for institutional investors for whom the transaction costs are much lower than for individual investors.

The organization of the rest of this paper is as follows. Section II provides a brief review of the relevant literature. Section III describes the moving average method; Section IV discusses the methodology and the data; Section V presents the findings, and analyses the empirical results; and the last section contains a brief summary and conclusion.


Meese and Rogoff (1983) find that no economic model is available that could outperform random walk models. Raj (1988), employing tick data from the Sydney Futures Exchange, concludes that the application of simple trading rules cannot realize abnormal returns. Hudson, Dempsey, and Keasey (1996) employ 60 years of daily returns from the Financial Times 30 Index on the London International Stock Exchange. …

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